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What Is an Annuity?

Learn what an annuity is in this Howcast finance video with expert Gregory McGraime.

Transcript

An annuity is basically the combination of an investment and insurance, and I know it sounds confusing but it really isn't. A lot of people are worried, and there's a lot different types of annuities out there, but a lot of people are worried that if I saved up a lot of money for retirement, how much can I take out of that? And just to give you an example, let's say I saved a hundred thousand dollars for retirement, I don't know how much to use each year. And on one hand I want t use the money because I saved it for my entire life, on the other hand if I take out too much of that money each year in retirement, what happens if I go through it all? So an annuity comes in to try and answer that question or help people by providing a little bit of certainty. Like let me give you an example; let's say I had a hundred thousand dollars that I save for retirement, I can take that hundred thousand dollars and buy an annuity with it. And I'm taking my hundred thousand and I'm exchanging it, and the insurance company that I'm buying the annuity from is going to pay me a certain amount for the rest of my life. So here's a hundred thousand dollars insurance company and the insurance company is going to pay me, maybe seven thousand dollars every year for the rest of my life. So what happened there? It can be great if I live a long life time, I can get well more than my hundred thousand dollars back, but what happens if I die right away? I just gave a hundred thousand dollars to the insurance company and neither me nor my beneficiaries or my family members got any benefit from that money. So annuity's real goal is to provide lifetime guaranteed income so that you never have to worry about out living your money. Now there are other types of annuities out there and the decision to buying annuities can be challenging for a couple of different reasons, annuities are very complex, they have a lot of different terms that can be hard for the average person to understand, and a lot of times the people selling you annuities get paid on a commission basis. So I think you could see where I'm going with this, if I get paid a thousand dollars to sell you annuity A and five hundred dollars to sell you annuity B, which way do you think somebody's gonna steer you?
So always be aware of that when shopping for annuities and make sure annuity is really appropriate for you situation first before moving ahead and investing in one.

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